Modigliani & Miller
Kerry Back

How much debt should a company have?
- There is a wide range of debt levels.
- Public companies relatively low.
- Private equity/leveraged buyout funds relatively high.
- What are the pluses and minuses?
Hold investments and operations constant
- Consider a financial restructuring with no effect on investments or operations.
- Issue equity to pay down debt or borrow money to repurchase shares.
- Anything that increases enterprise value is good for shareholders.
- Suppose EV = 300, debt=100, equity=200
- Suppose we can borrow 20 more to repurchase shares and increase EV to 310
- Now debt = 120
- Equity = 190
- Shareholders get 20 in share repurchases, so 210 total.